July 01, 2011

Divided Appeals Court Rules Against IRS In Tax Refund Dispute

Updated 12:47 p.m.

A divided federal appeals court in Washington said a group of taxpayers will be allowed to challenge the procedure the IRS set up to refund billions of dollars collected through an unlawful tax on telephone calls.

The full U.S. Court of Appeals for the D.C. Circuit voted 6-3 to send back to the trial court a dispute over whether the IRS refund procedure is unconstitutional. The 10 plaintiffs want an injunction ordering the IRS to craft a new refund method.

The appeals court did not take a stance on the merits of the IRS’s refund scheme, instead addressing only whether the court has oversight. The court ordered additional proceedings in the U.S. District Court for the District of Columbia.

Goldstein, Howe & Russell name partner Thomas Goldstein, who argued for the taxpayers in the D.C. Circuit, said he was reviewing the opinion. Goldstein did not provide immediate comment. Gilbert Rothenberg, acting deputy assistant attorney general for appellate litigation at the Justice Department's Tax Division, argued for the IRS.

“Obviously we are disappointed with the court’s decision," Rothenberg said. "We will assess our options and decide how to proceed after carefully studying the majority and dissenting opinions.”

At issue is whether the plaintiffs must first file refund claims with the IRS and then litigate their dispute in tax suits or whether the group of taxpayers can sue under the Administrate Procedure Act without taking any of the earlier steps. A report issued by the Treasury Inspector General for Tax Administration said the IRS illegally collected $8 billion between February 2003 and August 2006.

The six judges in the majority, including Janice Rogers Brown, who wrote the opinion for the court, rejected the IRS claim that the suit is barred because it seeks restraint of the assessment and collection of taxes. The IRS, the majority said, sees a world in which “no challenge to its actions is ever outside the closed loop of its taxing authority.”

“This suit is not about the excise tax, its assessment or its illegal collection. Nor is it about the money owed the taxpayers,” Brown said. “This suit is about the obstacle course, and the decisions made by the IRS while setting it up.”

Brown said the suit is permitted under the Administrative Procedure Act because it “questions the administrative procedures by which the IRS allows taxpayers to request refunds for the wrongfully collected excise tax.”

Regardless of who wins the litigation in the trial court, the D.C. Circuit said, there is no certainty the plaintiffs will be entitled to a tax refund. The IRS, the majority said, may adopt a “new version of the same notice after fixing any substantive and procedural defects.”

The IRS, Brown wrote, is no victim. The taxpayer plaintiffs “are not raiders in pursuit of an unwarranted windfall.” The plaintiffs, the court said, “are aggrieved citizens in search of accountability.”

The three judges who wrote in dissent said the plaintiffs have an adequate alternative remedy—a tax refund suit.

The government announced in 2006 it would refund the excessive taxes. A person who wanted a refund was asked to check a box on the 2006 income tax return. The standard refund ranged between $30 and $60.

Judge Brett Kavanaugh, joined in dissent by Chief Judge David Sentelle and Judge Karen LeCraft Henderson, said tens of millions of taxpayers collected a refund through what the judge called a “simple” procedure.

“Approximately 90 million Americans followed those simple instructions and promptly received their refunds,” Kavanaugh said. “As remedial government programs go, this one worked reasonably well.”

Kavanaugh said the IRS “aggressively publicized” the refund procedure. The judge said the 10 plaintiffs in the suit were aware of the refund rules and “none of them chose any of the readily available alternatives for obtaining a refund.”

The plaintiffs’ objective, Kavanaugh said, is class certification.

“It seems that plaintiffs have deliberately avoided filing individual refund claims with the IRS and filing tax refund suits because they think they have a better chance of obtaining class certification if they don’t take those steps,” Kavanaugh said. “And class certification is a necessary prerequisite to the class-wide jackpot plaintiffs are seeking here.”

Lawyers for the plaintiffs, Jonathan Cuneo of Washington's Cuneo, Gilbert & LaDuca and Nicholas Chimicles, senior partner and chairman of the class action firm Chimicles & Tikellis, in Haverford, Pa., said in a joint statement the "majority determined that the lower court had the authority to hear the case and addresses persuasively each of the dissent’s contentions to the contrary."

The plaintiffs, Chimicles and Cuneo said, "are confident that they will establish under the APA the unlawfulness of the refund procedure that the IRS created and succeed in securing relief for the millions of taxpayers who have never benefited from that refund program."